T
he great wealth transfer is underway, with up to $25 trillion in real estate owned by older generations poised to be passed down - and potentially fought over - within families. By 2048, a staggering $105 trillion is expected to be transferred from baby boomers and older generations, with real estate making up a significant portion of this wealth. The silent generation and baby boomers alone own nearly $25 trillion in real estate combined.
However, handing down property can be fraught with financial and emotional pitfalls for families. Wealth advisors warn that disputes over ownership and usage are common, along with concerns about taxes and maintenance costs. While selling the property and dividing the proceeds may seem like a straightforward solution, it's not always possible or desirable.
To minimize taxes, costs, and family battles, lawyers and wealth planners recommend taking certain measures when passing down real estate. Here are five secrets to successful inheritances:
1. Transfer real estate in your will or through a trust to avoid a major tax bill. This approach can help heirs avoid paying capital gains taxes on the property's appreciation since you originally bought it.
2. Use LLCs and trusts to shield the home from lawsuits. By placing homes in an LLC and setting up a trust for the kids' benefit, families can protect their assets from creditors and disputes among siblings.
3. Outline who gets to use the home and how. Parents can create operating agreements that dictate rules for property usage, such as restricting transfers to spouses or laying out holiday weekend schedules.
4. Set aside liquid assets for the house's upkeep and insurance. This ensures that heirs can maintain the property without financial burdens or resentment towards those contributing financially.
5. Prepare for the likelihood that some heirs may want to cash out. Parents should plan for contingencies, such as buyout provisions or using trust assets to purchase siblings' interests in the LLC, to accommodate changing circumstances and ensure the home remains a treasured family asset.
